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Financial shocks and the US business cycle

  • Nolan, Charles
  • Thoenissen, Christoph

Employing the financial accelerator (FA) model of Bernanke et al. [1999. The Financial accelerator in a quantitative business cycle framework. In: Taylor, J.B., Woodford, M. (Eds.), Handbook of Macroeconomics, vol. 1C. Handbooks in Economics, vol. 15. Elsevier, Amsterdam, pp. 1341-1393] enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector during post-war US business cycles. These shocks are found to (i) be very tightly linked with the onset of recessions, more so than TFP or monetary shocks; (ii) remain contractionary after recessions have ended; (iii) account for a large part of the variance of GDP; (iv) be generally much more important than money shocks and (v) be strongly negatively correlated with the external finance premium.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 4 (May)
Pages: 596-604

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Handle: RePEc:eee:moneco:v:56:y:2009:i:4:p:596-604
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